Land and Property – extending claims and definitions
It is common ground that a new self-contained residential dwelling is not treated as such for VAT purposes if it is incapable of being either used or disposed of independently. This generally prevents ‘granny annexes’ from benefitting from either the zero-rate on construction or claims under the DIY housebuilders scheme.
Restrictions on separate disposal which are included within planning consent granted have often prevented the application of the zero-rate for construction costs and / or claims under the DIY scheme. Therefore, it is important to know whether such restrictions maybe applicable to prevent unexpected VAT costs. However, some restrictions do not necessarily prevent zero-rating e.g. a restriction on the sale of a dwelling without adjoining farm land does not necessarily prevent either the zero-rate from applying on construction costs, or a DIY housebuilders claim.
This was the issue in a recent Tribunal decision. A restriction on disposal was contained within the planning permission issued by a local authority; however, whilst the property sat within the geographical perimeter of the local authority, it also sat on land owned by a national park. As such it came within the authority of the national park and not the local authority for planning purposes. Whilst planning permission may have been required for other purposes, the local authority was not the relevant planning authority and therefore the permission granted had no effect. This meant that the restriction was not effective, and the property was eligible for a claim under the DIY housebuilders scheme.
This reflects the complexity of VAT, and the importance of understanding the core rules and applicable definitions. There are several reliefs available from VAT at both the zero and reduced rate, but only where the relevant circumstances and / or facts exist. In the same way, an Option to Tax on an otherwise exempt property transaction can produce significant cash-flow savings, but should not be entered into lightly, unless the full facts are considered. Businesses can soon find themselves out-of-pocket and/or falling foul of anti-avoidance provisions.
The VAT law concerning land and property transactions and developments continues to create issues, which tend to be costly and are often avoidable. Anyone considering a transaction or development relating to property should seek advice on the VAT position and / or consequences as small oversights or misunderstandings can be costly.
For further advice on land and property contact Karen Mulcahy or Sarah Franklin on 01962 735350.
Compound Interest – have we reached the end of the road yet with this debate?
The Advocate General has issued her opinion in the Littlewoods case concerning Compound Interest – it is an opinion that, not untypically, leaves more questions than answers, and therefore we will have to wait for the full decision of the European Court of Justice (ECJ) in order to achieve the hoped for clarity on this issue.
The case concerns whether repayments of VAT which had previously been paid due to an error by HM Revenue and Customs (official error), are sufficiently compensated by the award of simple interest, or whether they should be awarded compound interest or another form of remedy.
Many businesses have benefitted from repayments in such cases where VAT has been paid based on HMRC’s (legacy HM Customs and Excise) mistaken interpretation of VAT regulations. For example, motor retailers had historically accounted for VAT on the sale of demonstrator vehicles, even where the VAT incurred on the purchase could not be recovered; this was later determined to be incorrect as a result of the clarification obtained in a case taken by the Italian Republic – we now know that where input tax recovery is blocked on the purchase of a demonstrator car, as it is considered to be used in part for non-business purposes, the onward sale is exempt from VAT.
Claims for such overpaid VAT could (until 31 March 2009) be made going back to the date of first VAT registration, which in some cases was as far back as April 1973.
VAT repayments in cases of official error have always been awarded simple or statutory interest, as contained in section 78 of the VAT Act 1994 (replacing earlier legislation). However, many businesses consider that the award of simple interest is insufficient compensation, and have made a claim for compound interest to be paid instead. If successful this would lead to significantly higher repayments from HMRC, particularly when you consider the high interest rates experienced during the 1980s and 1990s.
In the current case, the ECJ has considered whether the UK has effectively implemented the European legislation in respect of the principles of both effectiveness and equivalence. The principle of effectiveness provides that Member States of the EU must not make it impossible or unreasonably difficult for a business to obtain a remedy, whilst the principle of equivalence provides that Member States must treat similar matters in a similar way; on this basis, a business should be able to obtain a reasonable level of compensation, in the same or similar way to other compensation payments for other similar taxes.
It is understood that the rules provided for claiming overpaid VAT are effective, however, the equivalence point has remained contentious. It appears from the narrative of the Advocate General’s opinion that simple interest is considered a sufficient remedy, but only where compound interest is not provided as a remedy for other similar taxes. As such, the Advocate General has indicated that the Court should rule that the UK considers whether compound interest is available for similar taxes and suggests that a further reference to the ECJ may be necessary on this point.
It is possible that the decision of the full Court (which we are expecting in the spring of this year) will add further clarity as to whether ‘similar taxes’ means just indirect taxes or direct taxes, but until then the compound interest debate looks set to continue. If a further reference is to be made we could still be several years away from an answer – until then the book remains open.
Nevertheless, even if compound interest is considered to be the appropriate remedy, businesses may still be prevented from receiving an award of compound interest. Under the Limitation Act (which sets out the time limits in which claims are to be made) for example, many opportunities to make claims are limited to the sixth anniversary of a certain event. Using this as a dictating principle many of the VAT claims will be adjudged as out-of-time.
Whilst the issue of compound interest may be reaching the end of the road, there are still opportunities for businesses to recover overpaid or underclaimed VAT for the past four years – if you think you may have paid too much VAT or would like to consider ways of releasing cash-flow benefits, contact Karen Mulcahy or Sarah Franklin at The VAT Consultancy on 01962 735350.
Pre-Registration VAT Recovery on Business Assets Owned by Previously Deregistered Entities
A move towards fiscal neutrality has been announced by HMRC in their Brief of 01/12, in connection with recouping VAT as pre-registration input VAT (in certain circumstances) which was previously declared as output VAT on business assets on hand at the time of the (earlier) deregistration of the same entity.
HMRC have previously allowed, on a more formalised discretionary basis, input VAT recovery in situations where the claimant has not held a valid tax invoice (as defined under Regulation 29(2) of the 1995 VAT Regulations SI 1995/2518). However, a sticking point has been where an entity has deregistered for VAT and accounted for VAT on assets on hand at close of business/registration. HMRC require this VAT to be declared as output tax as a “self-supply”. In such a situation, such entities will not hold a valid tax invoice and, technically, they were not entitled to use alternative evidence for input VAT deduction.
The policy change announced in this Brief will apply to entities which have deregistered because they were below the limit for VAT registration, accounted for output VAT on their assets on deregistration but continued trading and using the assets for business purposes. However, it will allow VAT recovery of this self supply charge but only if the entity in question had to reregister within four years of the previous deregistration. Otherwise the input VAT recovery will not be covered by these provisions (under the four year rule). Capital goods items are dealt with under the capital goods scheme rules and not Regulation 111. Capital goods scheme input VAT recovery may be recoverable over a longer period.
Interestingly, HMRC mention a capital goods scheme limit of over £100,000 rather than of over £50,000 for computers, ships and aircraft in this Brief. Here at The VAT Consultancy we await more details with interest – Budget Taster perhaps or unintended error?
VAT and Salary Sacrifice: the new changes
The provision of salary sacrifice schemes was probably not anticipated in 1973 when VAT was first introduced in the UK – and this is evident from the number of cases concerning the treatment of employee contributions which have been considered over the years. Nevertheless, and irrespective of what has gone before, the decision in the Astra Zeneca case last year has helped to provide clarity, and HMRC subsequently issued two Business Briefs (28/11 and 36/11) on the issues.
Historical Position
Prior to the Astra Zeneca case decision, HMRC policy was to make a distinction between the VAT treatment of supplies of goods and services to employees by deduction from salary (VAT claimed on the cost, and VAT payable on the amount deducted), and those provided under a salary sacrifice arrangement (VAT claimed on the cost but no VAT payable on the amount of salary sacrificed) – albeit that both resulted in the employee ending up with less ‘cash’ at the month end.
The Astra Zeneca Decision
The essence of the European Court decision is that there is no longer a distinction between deductions from salary and salary sacrifice. This being the case, HMRC have taken the view that whilst it is appropriate for a business to claim the VAT element of such costs, the business must also account for and pay VAT (where appropriate) in respect of the amount of salary either deducted or sacrificed, thus providing a common approach for both.
What Now?
With effect from 1 January 2012, the amount on which VAT is due, under salary deduction or sacrifice schemes, is the amount deducted from the employee. However, where the amount charged or deducted is less than the cost to the employer, VAT will be due on that cost value.
These changes do not, however, apply where the salary sacrifice arrangements were already in place on or before 27 July 2011 (the date of the Astra Zeneca decision) or a fixed term arrangement expires. In such cases VAT will continue not to be due until the arrangements are reviewed or the term expires.
Exceptions
Employers should, nevertheless, take care to not charge and / or account for VAT on supplies which are exempt from VAT, for example: -
- nursery vouchers
- pension contributions, and
- supplies on which VAT has not been claimed by the business
VAT will also not be due where no charge, deduction or sacrifice is made, such as free or subsidised meals, as long as they are made available to all employees.
Commentary
Businesses should now be reviewing their current arrangements and where necessary bring them in line with the new changes.
The outcome of the Astra Zeneca case should probably not come as any great surprise, and in a number of ways simplifies the VAT treatment, by treating similar things in the same way – and appears to provide a further level of fiscal neutrality. Albeit that the result is a further amount of VAT payable by the business (as charged to the employee) this approach does follow the basic principles of VAT, in applying VAT to supplies of goods and services when supplied by a VAT registered business. It doesn’t, however, mean that the new approach is going to be popular!
If you would like further assistance with this or any other VAT matter, email Karen Mulcahy or contact on 01962 735350.
HMRC change surcharge penalties for small businesses
Although no formal announcement has been made, HMRC has recently amended Notice 700/50 in relation to the surcharge regime as it relates to businesses with a turnover below £150,000.
Previously for any business which submitted its VAT return and/or payment late, HMRC would not impose a surcharge on the first occasion that this happened. Instead they would issue a warning letter telling the business they were in the “surcharge regime”. If within the next 12 months another return or payment was late a penalty of 2% would then be levied, with this increasing to 5%, 10% and then 15% for each subsequent late return/payment. The business would have to render and pay its VAT returns on time for a full 12 months to come out of the regime. These rules will still be applied for business with an annual turnover in excess of £150,000; however the rules for smaller businesses have been relaxed.
On the first occasion that a business with a turnover below £150,000 is late HMRC will issue a help letter. If the business then misses another return deadline within 12 months it will be put into the surcharge regime as detailed above.
Also, HMRC will not normally issue a surcharge at either the 2% or 5% rates if they calculate it to be less than £400. Surcharges issued at the 10% and 15% rates are subject to a minimum charge of £30.
If you have experienced problems with the default surcharge regime or would like to explore whether you may have a case to appeal against a surcharge assessment please contact us. For a full break down of the penalties that may be imposed if a VAT return is submitted, or paid, late please see http://www.hmrc.gov.uk/vat/managing/problems/penalties.htm
If you would like further assistance with this or any other VAT matter, please contact Hayley Rodgers on 01962 735350.
Standard rating newspapers – would this encourage better self-regulation?
Newspapers not agreeing to self-regulation could lose their exemption from VAT under a proposal being explored by the Press Complaints Commission. David Elstein (currently Chairman of Screen Digest, Luther Pendragon, openDemocracy.net and the Broadcasting Policy Group) floated the idea at a City University Seminar on 1 November 2011 that the potential loss of the current zero rating on newsprint could encourage better media self-regulation for resistant newspaper owners.
It is also believed by other industry bodies that such a threat could be persuasive in light of the recent phone hacking scandal (together with other media regulation issues). Whilst it is common practice for HM Revenue & Customs (“HMRC”) to limit reliefs eg, a pharmacist dispensing drugs, medicines etc must be a registered pharmacist in order for the supplies to be zero rated, and certain goods and services can only be zero-rated when purchased by eligible bodies (or when purchased by someone else to donate to an eligible body), it is difficult to see how they would do this in the media industry. It would be time-consuming to implement regulatory or policy changes and it would be difficult to distinguish between the different types of media.
No immediate changes to the VAT relief on newspapers are expected, if any at all, and it has been suggested that it may be more effective to offer incentives than threats. Other non-VAT related ideas such as loss of rights to certification have also been floated for non-compliance with self-regulation.
Whilst changes to the VAT liability of newspapers may be unlikely, clearly people are thinking about it and some editors and publishers are keen to sort out the media regulation issues themselves along with a sensible set of Press Complaints Commission reforms rather than wait for the outcome of the Leveson inquiry.
For further information, please contact Sarah Franklin on 01962 735350.
Channel Islands: LVCR legality issues being raised
We see that questions are being raised about the legality of the UK blocking low value consignment relief (LVCR) only on goods entering the UK from the Channel Islands.
The point at issue here is one of fiscal neutrality – now a common area of challenge in VAT cases and one that was at the core of the recently released ECJ Rank case. Rank was successful in arguing that there must be a level playing field from a VAT perspective with respect to (in this case) gaming machines with similar functionality.
The argument from the Channel Islands is that the UK is not being fiscally neutral in making imports from the Channel Islands more costly than those from other non EU locations. For more on this please contact Julie Park on 01962 735350
Tax treatment of termination payments: your essential guide
In the present economic climate the tax treatment of termination payments is a timely topic and one that friend of The VAT Consultancy, Employment Tax expert Paul Coombes of Action Tax, spends a lot of time helping clients with at the moment.
With that in mind we are pleased to invite you to this free online seminar where Paul will address the key issues:
- What is redundancy and how does it effect the taxable nature of termination payments
- When are Payment in Lieu of Notice payments taxable
- What evidence to you need to support your stance concerning tax free payments
Not forgetting that this is also an area where HMRC are frequently known to target clients’ self-assessments, this is clearly a complex area where care need to be taken and finance, HR directors and accountants should attend.
Click here to register your place on the event.
If you would like to receive details of our online seminars on a regular basis, then please get in touch with: joanna.prado@thevatconsultancy.com
Channel Islands – low value import VAT relief comes to an end
The Government has announced that it is withdrawing Low Value Consignment Relief (LVCR) from 1 April 2012 on goods sent to the UK from the Channel Islands.
LVCR applies when items valued at £15 or less are imported in a single shipment from outside the EU. The Channel Islands are treated as being outside the EU for VAT purposes and as a result a number of businesses selling CDs & DVDs online located distribution hubs there as a way of selling low value goods to the UK VAT free. The cost to the Government in the news release, has been put at around £140m annually. Many are of the view that, whilst this on the one hand levels the playing field for businesses in the UK operating in these areas by removing the advantages enjoyed by businesses already established in the Channel Islands before licences to trade were limited, it will likely mean that businesses will look elsewhere. The UK and Channel Islands could therefore lose businesses to overseas locations that are not caught by the change.
LCVR will continue to apply to goods coming from other countries outside the EU with a value of £15 or less and there are no plans for this to change. The question of course arises as to where the next nearest non-EU location is located – Switzerland, already popular due to its advantageous tax regime? Clearly the additional cost of postage needs to be considered and any increased delay in delivery time.
If you would like any further advice or assistance with this, then please contact Julie Park on 01962 735350.
VAT treatment of financial advisory fees… the debate continues
There has been much debate and speculation regarding the impact of the Retail Distribution Review (RDR) on the VAT treatment of financial advisory fees. In a nutshell, there is no change to the core VAT treatment, i.e. a fee for arranging a financial product or transaction remains exempt from VAT (where it falls within the financial exemption), and the separate supply of advice remains subject to VAT at the standard rate, as for all professional advisory services. The hurdle is in identifying the VAT treatment of supplies that combine, or intend to combine, both advisory services and a transaction.
It is anticipated that HMRC will not issue formal guidance before the New Year, but draft guidance recently published makes reference to the intent or purpose of an advisor’s services. This means that an advice only led service will remain subject to VAT at the standard rate, but where the intention for receiving the advice is directly connected with a potential subsequent financial transaction the whole fee remains exempt from VAT. However, HMRC have indicated that advisors relying on the exemption will need to obtain evidence that their customers have agreed to the advisor arranging transactions for them, or that they intended that the advisor would arrange transactions for them, when the advisor’s services were engaged.
This is reflective of the ‘purposive’ test which we have seen evident in a number of case decisions, but disappointingly retains a level of subjectivity and uncertainty with regard to the VAT treatment of advisory services. Where an advisor does not keep on top of administrative functions, it may not be possible to produce evidence of the intent that existed at the time an agreement was entered into with a client; where no transaction resulted from the advice, HRMC are likely to regard the service as a separate advice-led service and subject to VAT at the standard rate. Advisors should review the terms of the contractual arrangements they enter into with their clients and, if necessary, revise the content to reflect the substance of the service, i.e. does the client intend for the advice to lead to a transaction, or is it purely advice?
Going forward it will be important for financial advisors to understand both what is being supplied as well the motive of its customers, in readiness for the changes which will take effect from 1 January 2013.